Call Option

An option contract in which the holder has the right (but not the obligation) to buy the underlying asset at an agreed-upon price on or before the expiration date of the contract, regardless of the prevailing market price of the underlying asset. One buys a call option if one believes the price for the underlying asset will rise by the end of the contract. If the price does rise, the holder may buy and resell the underlying asset for a profit. If the price does not rise, the option expires and the holder's loss is limited to the price of buying the contract. Call options may be used on their own or in conjunction with put options to create an option spread in order to hedgerisk.

call option

Call option.

Buying a call option gives you, as owner, the right to buy a fixed quantity of the underlying product at a specified price, called the strike price, within a specified time period.

For example, you might purchase a call option on 100 shares of a stock if you expect the stock price to increase but prefer not to tie up your investment principal by investing in the stock. If the price of the stock does go up, the call option will increase in value.

You might choose to sell your option at a profit or exercise the option and buy the shares at the strike price. But if the stock price at expiration is less than the strike price, the option will be worthless. The amount you lose, in that case, is the premium you paid to buy the option plus any brokerage fees.

In contrast, you can sell a call option, which is known as writing a call. That gives the buyer the right to buy the underlying investment from you at the strike price before the option expires. If you write a call, you are obliged to sell if the option is exercised and you are assigned to meet the call.

Hamada and Sherris (2003) applied Wang transform to price European call option written on a security with prices following a geometric Brownian motion and they derived the Black and Scholes option price formula.

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